1. What are the six core principles
of economic reasoning?
•  People choose.
–  they seek by their choices to obtain the best possible
combination of costs and benefits
•  All choice’s involve costs.
–  In any decision, there is a cost. The opportunity cost is the
most desirable alternative we don’t choose.
•  People respond to incentives in predictable ways.
–  People can be expected to pursue rewards. If there is a
two for one sale more people will come in the store.
•  People create economic systems that influence
individual choices and incentives.
–  Economic behavior occurs in a climate of rules, formal and
informal. The “rules of the game” influence the choices
people make in particular cases. Rules often act as
incentives. Tax laws, for example, influence people’s
behavior.
•  People gain when they trade voluntarily.
–  Voluntary trade is when people exchange
something they value less for something they
value more. We exchange money for concert
tickets. The chance to see a movie is worth
more than the $7.oo dollars for the ticket.
•  People’s choices have consequences that
lie in the future.
–  People make choices based upon the longterm benefits. For example a home owner will
take better care of their house than an
apartment because they have no long-term
interest in the market value of that apartment.
2. What are the factors of
production?
•  The factors of production are land, labor
and capital. Land is all of the natural
resources used to produce goods. Labor
is the effort that person devotes to a task
for which they are paid. Capital is either
human capital, which is the investment in
experience training and education that a
person brings to a task. Or physical
capital, which is the human made goods,
used to produce other goods and services.
3. Why does scarcity exist?
•  Scarcity exists because of the disparity
between desires and resources. We have
unlimited wants and needs and a limited
amount of resources. This leads to
choices, tradeoffs and opportunity costs.
4. Why do we always have to give
up something to get something
else?
•  Choices have to be made. There is a
limited amount of resources.
Economists see all costs as
opportunity cost because tradeoffs
have to be made. Every choice
includes the most desirable option that
wasn’t chosen.
5. How should resources be
allocated
•  Resources should be allocated to gain the
greatest benefits compared to costs. An
economy should consider what is to be
produced, how it is to produced and who
will benefit. Also, resources should be
allocated as to achieve the greatest
efficiency so that all resources are being
used.
6. How do production possibilities
reflect opportunity costs?.
•  The production possibilities curve
shows efficiency when all values are
along the production possibilities
frontier. These alternatives show what
is produced and what is not produced
(opportunity cost). Growth is shown by
a shift to the right of the entire frontier,
decrease is shown as a shift to the left
and underutilization is shown by a
point inside of the frontier.
7. Who makes the economic
decisions?
•  Command Economy: Government based
upon national political, economic goals
•  Market Economy: Markets send
messages about price and production
•  Mixed (Modern) Economy: Markets
decide some things, governments decide
others
•  Traditional Economy: Tradition and
practice